OPINION:
America’s small businesses have borne the brunt of the economic lockdown caused by the coronavirus, with consumer foot traffic into restaurants, bars, dry cleaners, barber shops and hotels ground to a halt seemingly overnight. For these small businesses to get back to where they were and better than before, the government needs to get out to the way.
The magnitude of the economic devastation caused by stay-at-home orders and social distancing practices across the country has become painfully apparent. Many small companies are teetering on the edge of bankruptcy and some have already permanently closed their doors. Over the past three weeks, a record 16.6 million Americans have filed for jobless benefits, the majority of whom were most likely employed by smaller businesses.
The recently enacted Paycheck Protection Program, which provides small firms (those with fewer than 500 workers) with $350 billion in loan guarantees and loan forgiveness for rehiring laid-off workers, is only meant to be short-term financial lifeline. At some point soon, we must reopen the economy or thousands of small businesses will permanently close their doors.
According to economist Brian Wesbury of FT Advisors, as each month goes by, the economy loses a portion of its original capacity and will recover a smaller share when it reopens: “If we wait until the end of April, it will be, say 92 percent. The end of May and it’s 85 percent. The end of June and its even less.”
To unleash small business job creation, which account for 64 percent of jobs created in the United States, we must reduce regulatory red tape and tax burdens instead of spending trillions of dollars on infrastructure programs or other farfetched initiatives that will take months or even years to trickle down to small companies.
Although Congress did provide some payroll tax relief for employers by allowing them to pay their 2020 payroll taxes through the end of 2022, significant assistance is still needed. Congress should let small business owners keep more of their own money by enacting a one-year tax holiday from all federal income and payroll taxes. Specifically, companies with fewer than 500 employees — including start-ups, sole proprietors and the self-employed — should pay zero federal taxes a period of 12 months.
The tax savings for a typical small business would be significant. For example, a firm with 100 employees with the typical employee making $50,000 annually would experience FICA savings just under $4,000 per employee, with the employee saving $4,000 themselves. In this example, over a 12-month period a payroll tax holiday would provide $800,000 in total tax savings, half for the employer and half for the employees.
Further, let’s assume the payroll at this same firm is equal to 75 percent of revenue and the firm has a 10 percent profit margin. That gives this firm a profit of $665,000, which means a federal income tax liability of around $200,000. Zeroing out both payroll and income tax for a period of 12 months produces $1 million in tax relief for this small business operation. That money could go immediately into retaining and hiring workers, as well as investing in equipment needed to become more productive during the coming recovery.
Congress should also consider eliminating capital gains taxes for long-term investments in small businesses. The 2017 Opportunity Zones law included a provision to reduce and eliminate capital gains taxes for certain taxpayers who invest in distressed urban and rural areas. Congress should extend this tax relief to investments in small companies as defined under the Paycheck Protection Program. This would produce a flood of new investment funds in both existing small businesses and new start-up ventures.
The COVID-19 outbreak and the resulting economic devastation is a once-in-a-century event. American small businesses — the backbone of our economy — need a bold solution from leaders in Congress to meet this historic challenge. There is optimism that the country could be turning the corner on the pandemic, but we have a long road ahead of us. While the success of Wall Street is important to countering the economic effects of the virus, it is the businesses on main street that will power the engine of the American recovery.
• Cesar Conda, a founding principal of Navigators Global LLC, is a former chief of staff to Sen. Marco Rubio, Florida Republican, and a former Republican staff director of the U.S. Senate Small Business Committee.
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